Instagram's Buyout: No Bubble to See Here

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Instagram's Buyout: No Bubble to See Here

Instagram’s billion-dollar sale to Facebook raised eyebrows Monday, renewing cries of a new tech bubble. But relative to other major acquisitions, turns out it's a pretty good deal and not the least bit inflationary.

To put the acquisition in perspective I pulled together data from a selection of 30 notable internet acquisitions over the last 10 years, from Broadcast.com to OMGPop to see if Facebook/Instagram for $1 billion was as crazy as everyone thinks. (I left out companies without public purchase prices or user stats.)

Codeword

The spreadsheet below captures the acquisition date, dollar amounts, and ballpark counts of the users and employees at the time of acquisition. Be warned: Any of these numbers are very rough, cobbled together from Internet Archive searches, old news articles, Quora answers, and tech blogs. If you have more accurate information, please leave a comment and I’ll fix it.

A startup is acquired for any combination of the technology, talent, or the user base.

If we look strictly at the acquisition cost per user, Facebook got a relative deal with the Instagram purchase, paying roughly $28 for each of Instagram’s 35 million users. (The median cost across all the acquisitions is about $92 per user.)

Compare that to acquisitions like Aardvark ($555/user) or Jaiku ($240/user), and it becomes clear which were likely technology or talent hires. The glaring exception is Yahoo’s famous $5.7 billion purchase of Mark Cuban’s Broadcast.com in 1999 – about $11,000 each for 520,000 monthly active users, or 10 times any other startup. (Broadcast.com skewed the chart so much, I had to leave it off.)

COST PER EMPLOYEE

But if you look at the payout per employee, Instagram is completely off the charts. If split equally, each of Instagram’s 13 employees would make nearly $77 million (though Wired's Mike Isaac reported exclusively that CEO Kevin Systrom and co-founder Mike Krieger would take home $500 million themselves alone).

The nearest runner-up is YouTube, with a paltry $24 million for its 2006-era staff of 67. Skype, Broadcast.com, and Myspace all top the charts. The median? About $3 million.

Some would point to this as a sign of a bubble, but I think it’s more likely it just reflects the incredible scalability of modern app architectures. Using EC2 and solid monitoring, Instagram can quickly scale up to support a million new users overnight with very little additional engineering effort.

The User-to-Employee Ratio
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Instagram’s numbers are exactly what you’d want to see in a social network – high user counts with the lowest number of employees. This ratio is a measure of efficiency, and it’s no surprise that Instagram comes out on top here, with one employee for every 2.07 million users.

The second highest user-to-employee ratio is OMGPOP, famous for developing Draw Something, the fastest-growing mobile app in history. With only one employee for every 875,000 users, they were able to scale to 50 million users within 50 days.

On the other end of the scale are the short-lived Q&A service Aardvark, with one employee for every 1,800 users, and customer-service giant Zappos with one employee for every 3,400 users.

More than anything, the app ecosystem rewards efficiency: the ability to massively scale with very little engineering effort. I’m guessing these ridiculously lean startups with huge exits aren’t a freak occurrence. We’ll see more of them as the rest of the world catches up, and learns how to do more with less.

Methodology
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All figures are at the time of acquisition, and I favored active user counts over total registered users for calculating acquisition cost per year.